In the early days of the advisor sold DC business in the mid-1990s, a big problem was that advisors had too many plans concentrated with just a few record keepers and, in some cases, all of their plans with just one.
It made advisors look like product pushers rather than consultants.
Today, the problem for plan advisors, especially those with a healthy book of business, is that their plans are spread out among 10-25 record keepers. Advisors have been talking about consolidation, but will it really happen?
When advisors started selling DC plans, almost all of them were blind squirrels. Most brought their local wholesaler to their sales pitch. If there was a finals presentation, it was more often the case that each presentation included one advisor and one provider. It seems ludicrous now, but 20 years ago, it was the norm. It was also the norm back them that when a plan hired a new advisor they invariably also switched record keepers, in part because there was a 1% kicker for the advisor.
Soon thereafter, the 1% fee began to disappear, as providers did not want to incent churning — heralding the move to R Shares. Advisors also realized back then — with long blackout periods and clunky technology — that changing record keepers was akin to putting clients through a root canal, while changing advisors was like a teeth cleaning.
So as their business grew, advisors found themselves with many record keeper relationships, even though they might have preferred to be have 80% of their business with three to five providers. There is no incentive to change, and many experienced advisors can actually fix any problems that their clients might have had with their record keeper. Plus, there are fewer bad ones left.
Having relationships with too many record keepers is a problem for three reasons:
- Advisors will get better service for their clients and themselves if they have a significant amount of business with a provider, just like premium fliers get special treatment with their top airline.
- Conducting periodic due diligence with too many partners is time consuming.
- Advisors are more likely to get good data on the plan and the participants from top partners.
So will advisors start pruning their record keeper relationships? Call me cynical, but I doubt it. Although it will save advisors time and ultimately benefit their businesses in the long run, it takes resolve and time upfront to make the transition. While it makes a lot of sense for the advisor, it may not make sense for the plan sponsor. And advisor-of-record sales are still easier than record keeper changes.
The industry will take care of the problem through record keeper consolidation, but it might be wise for advisors to at least conduct a cost benefit analysis of how their business might benefit with 80% of their business with three to five record keepers.
